The life and times of an English ex-pat in South Africa

Tag Archives: electricity

What with seemingly endless energy shortages, simmering industrial unrest and innumerable social challenges, South Africa increasingly appears to be a country in trouble.

Although the continent’s second largest economy, and the one that still attracts the highest level of foreign direct investment, there are fears in some quarters that its star may be starting to wan – and will continue to do so unless swift action is taken.

For example, while South Africa may for years have boasted the largest GDP in Africa, it was knocked off its perch by Nigeria in April after a rebasing exercise, making the West African country more attractive to foreign investors overnight.

But the various gloomy perceptions about South Africa’s future were not helped last week by Moody’s decision to downgrade its credit rating to only two notches above junk status, continuing the steady fall from a 2009 high when the country boasted a top A3 rating.

Moody’s took the decision as a result of the developing nation’s deteriorating economic growth, an increasing budget and current account deficit and rising public debt levels (50% compared to 27% only five years ago).

These were caused, among other things, by rolling power outages, known locally as load shedding, apparently endless strikes in the all-important mining sector and generally slow domestic and global demand.

Although the move to cut South Africa’s investment grade status to Baa2 from Baa1 was not entirely unexpected following warnings in July, it has once again raised fears that a slide into junk status could be on the cards.

Similar concerns are also being raised over the country’s five largest banks – Standard Bank of SA, Absa, FirstRand, Nedbank and Investec – after Moody’s likewise downgraded their rating to Baa2 status on Tuesday.

The problem is that, because the banks have sizeable holdings of sovereign debt securities, the SA government’s weakening credit profile is having an impact on their own perceived creditworthiness too.

But any shift to junk status would cost the country dear by triggering an automatic sell-off of its bonds by foreign institutional investors and resulting in new buyers charging higher interest rates in order to counterbalance higher levels of investment risk.

In real terms, this means that it would cost South Africa, and its private sector, significantly more to service their debts. It would also become harder to borrow money in order to fund much-needed projects such as infrastructure development. Other potential repercussions include a likely nose-dive in the value of the rand and a rise in inflation.

Credit downgrades

To make this situation a reality though, two out of the three credit rating agencies would have to make the move. But Standard & Poor’s has already assigned South Africa a BBB- rating, the lowest grade before junk, while Fitch is expected to follow suit in December. This would mean that the country does not have much further to fall.

In South Africa’s favour though, Moody’s appears to have given its sovereign currency the benefit of the doubt. By shifting its outlook on the rating from negative to stable, the agency has made it clear that change is unlikely to occur any time soon.

“It is clear that much hinges on economic growth over the medium-term”, he says, adding that South Africa “could indeed be downgraded by the ratings agencies should GDP growth remain weaker than expected for an extended period of time”.

But when “looking at the metrics of South Africa’s peers”, which include India and Brazil, Knee points out reassuringly that “the deterioration would likely have to be fairly significant to prompt ratings action”.

One area that the country really does need to sort out sooner rather than later if it is to prevent such deterioration though is its energy sector.

To this end, the government pledged to inject at least ZAR 20 billion (£1.1 billion) in equity to help plug state-owned utility Eskom’s funding gap at the close of last month – a move that saw both Standard & Poor’s and Moody’s hold off from downgrading its bonds to junk status, a seemingly a recurring theme here in South Africa at the moment.

Eskom needs the money not only to service the debt required to pay for completion of two new power stations vital to ease the country’s chronic power shortages, but also to maintain its existing ageing estate.

But Majuba is not expected to function at maximum capacity for another six months, making scheduled load shedding an ever-present threat to both business and the economy.

As a result of all this, organisations such as South Africa’s second largest supermarket chain, Pick ‘n Pay, have been working hard to reduce their exposure by finding ways to cut electricity consumption.

As David North, the retailer’s group strategy and corporate affairs director, explains: “The objective of saving money motivates any business. South Africa is not immune to energy price hikes or electricity outages from load shedding. So when you get a combination of rapid increases in pricing and uneven supply, most companies will look at how they can reduce these challenges.”

To date, the retailer has managed to slash its power usage by 30% per square metre against its 2008 store baseline simply by addressing lighting and refrigeration efficiency issues. Such action has saved it a total of ZAR 508 million on electricity (£28.6 million) since the project began.

In fact, last year alone the company’s ZAR55 million (£3.1 million) investment in retrofitting lighting and refrigeration across 10% of its stores and two of its key distribution centres saved it a huge ZAR14.5 million (£814,949).

Measures taken included implementing less energy-intensive lighting systems, encouraging staff to turn lights off when no longer required as well as introducing motion sensors and key-switches to automatically put them out at night.

Moreover, all of the retailer’s stores now have online electricity metering, which means that managers can monitor energy usage via a dashboard. It alerts them should a refrigeration unit suddenly start consuming more electricity than normal, for example, so that they can take immediate action.

But because 85% of Pick n’ Pay’s buildings-related carbon emissions are generated by electricity consumption, the move has likewise helped it slash carbon emissions by 19.4%, beating the target it set itself in 2010 of a 15% reduction by 2015.

The firm’s efforts have, in fact, earned it an accolade from the Carbon Disclosure Project for being the top-performing retailer in Africa. Which just goes to show that every cloud truly does have a silver lining.

According to a report just released by the International Energy Agency (IEA), the current state of the industry and a lack of access to electricity by vast swathes of the population are, unsurprisingly, putting a break on economic growth.

But as the IEA’s chief economist Faith Birol explains: “The pay-off [of getting it right] can be huge, with each additional dollar invested in the power sector boosting the overall economy by $15.”

Unfortunately for South Africa though, its energy situation appears to be in a bit of a mess.

The issue is that the company, which supplies 95% of the country’s power, faces a further funding shortfall of ZAR225 billion for the five years to March 2018.

As a result, it is currently unable to come up with enough money to service the debt required to pay for the completion of two new, and very necessary, power stations in order to tackle the country’s chronic power shortages.

Last month, the government announced it would put together a financial rescue package, the details of which are due to be announced on 22 October. Ratings agency Standard & Poor’s will then decide whether Eskom’s debt situation warrants its bonds being downgraded to junk status.

Economic impact

To have any real chance of plugging its funding gap though, economists have estimated that Eskom will need to increase its tariffs by at least another 13% per year for the next five years.

But the worry is that this situation will make South Africa increasingly uncompetitive on world markets. It certainly won’t help inflation or manufacturers already hit by rising labour costs and low demand for their products.

Or consumers for that matter, who are struggling with rising food and fuel costs, high levels of personal debt and unemployment rates of around 25%.

So the situation is not good by anyone’s standards – and doesn’t get any better for reading the US Central Intelligence Agency’s World Factbook either, which would appear to back up the IEA’s report.

The problem is that to make a dent in poverty and unemployment, which both contribute to societal stability, it is widely accepted that GDP needs to increase at twice that rate.

Another contentious issue, meanwhile, is how the country’s electricity is to be generated in the first place.

South Africa currently produces 77% of its energy using coal. It is, in fact, one of the seven largest coal-producing and one of the top five coal-exporting nations in the world. This means that the mineral, being its third largest source of foreign exchange capital behind platinum and gold, is vital to the country’s economy.

But after getting a bad name for itself as the continent’s worst polluter and as one of the world’s top 20 carbon emitters, it pledged to take action, submitting reduction targets to the Copenhagen Accord in January 2010.

South Africa has now promised to reduce national carbon emissions to 34% below 1994 levels by 2020 and 42% by 2025 – should it get the necessary financial, technological and capacity-building support from the developed world, that is.

And so far it seems to be trying to honour that vow. Since December 2011, the country has signed off 64 renewable energy projects, including wind and solar, which equate to more than ZAR100 billion (£5.5 billion) of both domestic and foreign investment.

Energy mix

So while renewable energy accounted for less than 1% of the country’s energy mix in 2012, it is expected to hit a much more healthy 12% by 2020, jumping to 17% by 2030.

According to research released last October by analysts Frost & Sullivan, this scenario would place it among the top 15 countries in the world in terms of renewable deployments.

But it seems that President Jacob Zuma also has a controversial personal interest in nuclear. After promising to purchase a fleet of power stations in his opening address to Parliament in June, following similar statements in his State of the Nation speech in February, he made a mysterious visit to see President Vladimir Putin in Moscow last month.

Immediately afterwards, Russian energy company, Rosatom, announced that it had signed a $50 billion deal with Pretoria to build eight nuclear reactors that would generate 9.6Gw of power by 2030.

The pact was based on a “build now, pay later” vendor-financed arrangement that would see Eskom buying back energy at high predetermined rates for up to 20 years.

But the move led to an outcry, with concerns being voiced over everything from corrupt and un-transparent procurement processes to the sheer cost of the proposals, which some feared could cripple the country as tariffs skyrocketed.

The Department of Energy appeared to backtrack very quickly though, countering that the Russian compact was simply a preliminary agreement on nuclear cooperation as part of a wider tender process that would also involve other countries over the coming months.

The government has since confirmed that Eskom will not act as the owner and operator of the new power stations. This process will instead be led by the Cabinet’s energy security subcommittee, which is chaired by no less than Zuma himself – a man said to regard a nuclear power project as part of his legacy.

But no matter how murky such a set-up may seem, what is clear is that how these various scenarios play out over the next few months will be crucial in terms of the impact on the health of South Africa’s economy for years to come.

I can’t think that I’ve witnessed scheduled rolling blackouts since I was a child during the dark days of the 1970s.

But I do remember the inconvenience of what seemed like endless power cuts as the lights were suddenly extinguished and we were bundled off to my grandma’s to indulge ourselves in the warmth of her coal fire.

In a just-in-case kind of way, my mam still insists to this day that her electric cooker has a gas hob so that eating can be assured one way or the other. Such scars run deep.

So needless to say, it was a rather unpleasant blast-from-the past last week when, yet again, the lights went out. After a week or so of relentless, sleeting rain across the entire eastern region of South Africa, which unfortunately included Gauteng, it turned out that state monopoly, Eskom, was suffering a soggy coal problem.

While this may sound like the lamest excuse ever when you’re chucking fossil fuel into a mega-hot furnace, apparently it’s legit – Eskom chief executive, Brian Dames, announced it to the world himself that the power outages were the result of wet coal from opencast mines, which by default were vulnerable to the weather.

To make matters worse, because it was allegedly too costly for the utility to cover its entire stockpile – with anything apparently – the heavy rain had also ended up soaking much of its existing coal supply.

The upshot of this debacle last Thursday though was that power had to be rationed and a two-hourly rotational ‘load-shedding’, or planned rolling blackout, schedule put in place across the country – a scenario not experienced on this scale since 2008 when a similar debacle cost the South African economy a stonking R50bn (£2.8 billion).

So after things had begun to look hairy last week, businesses were asked to reduce their power consumption by 10%, but it was just too late. We were for it.

And so it was that the full onslaught of this policy to save the national grid from collapse hit my humble abode in Parkhurst a tad before 8pm, but luckily just after I’d had my dinner.

As I scrambled around for my candles hidden carefully away in cupboards that I could no longer find, however, I realised with some trepidation that my house was now apparently unprotected.

As the electric fence and internal security system were currently without power to feed them, I felt distinctly vulnerable – and I’m not usually the neurotic type. But my Beloved was away travelling with work and I was all alone in a city with a shocking reputation for violent crime.

As a case in point, the hard-working guy who comes to do our garden every Monday had been accosted at gun point by a couple of thugs only the week before. He had been withdrawing his monthly wages from an ATM at the time, but in the blink of an eye was left destitute, with rent and nursery fees for his young child to pay for. Awful.

And if I were a robber, I’d certainly have been inclined to take advantage of the fact that it was dark and everyone’s security systems were down.

Hence sitting for the next two and a half hours jumping at every sound while trying to read my book by candlelight – and ensuring that my mobile phone was firmly in my line of sight so that I could alert our private security guard firm, Cortac, should the need arise.

Welcome to Africa

It turns out though that I had nothing to worry about as, according to my Beloved, these systems have 24-hour batteries to keep them going. But I certainly felt more reassured when he was sitting beside me on Sunday night as the power collapsed again for an hour. There’s nothing like (even ephemeral) safety in numbers.

Apparently that particular little incident won’t be the last of it, however. Eskom has made it clear that a combination of the unseasonal on-going rain and expected high demand as winter comes ever closer mean that there could be more scheduled electricity cuts over the next couple of months.

According to a posting on the local Democratic Alliance party’s website – the Eskom one couldn’t seem to offer information on anywhere in Johannesburg’s northern suburbs that I checked anyway –should demand exceed supply again, it’ll mean that the lights will go out in Parkhurst and its environs from 6pm to 10pm on Tuesday, Thursday, Saturday and Sunday nights. Oh joy.

Very sensibly though, a lot of local businesses already seem well prepared – presumably in the wake of similar problems six years ago.

My dentist, for example, assured me that, should the power go out in the middle of my second root canal treatment this year, I had nothing to worry about because he had his own generator. Which was, of course, a blessed relief and did serve to ease my discomfort somewhat.

But he’s certainly not the only one. Our local restaurant and bar area, Fourth Avenue, still seems to be keeping the lights on in the main. While some organisations have their own generators, it seems that others share with their neighbours, while yet others rent capacity to third parties in the same building. Which is all very entrepreneurial of them, it must be said.

As ever though, after the first shock of the crisis, everyone seems to be remarkably sanguine about it all. “Oh well,’ they say, rolling their eyes. “It is what it is. Welcome to Africa.”